Economists React: Don’t Expect QE3 This Week

Weak U.S. data and mounting euro-zone concerns have raised expectations that the U.S. Federal Reserve will embark on another bout of bond-buying to stimulate the economy.

But Fed watchers surveyed by Dow Jones Newswires generally feel the central bank isn’t ready to launch a third round of so-called quantitative easing, or QE3, just yet. Most say they believe such an announcement is unlikely at Wednesday’s conclusion of the Fed’s two-day policy meeting.

A key factor in that cautious assessment: Friday’s report that U.S. gross domestic product expanded at an annual rate of 1.5% in the second quarter. Although that is far from a stellar economic performance, it beat forecasts of a 1.4% gain and, for many, was strong enough to suggest the Fed’s Open Market Committee would wait rather than pull the QE3 trigger at this week’s meeting.

Analysts tended to argue that the central bank needs to see two more jobs data releases before reaching a consensus on the need for more stimulus. Many say they see the Fed as much more likely to act at its subsequent policy-setting meeting, scheduled for Sept. 12-13.

Here is a rundown of comments from analysts regarding their predictions for this week’s Fed meeting:

–J.P. MORGAN: There’s a less-than-50% chance the Fed will ease at its meeting, says strategist Kevin Hebner, who cites the need for additional labor market data. But he does see action at the September meeting as more likely. Mr. Hebner says he expects that when the Fed does ease, it will announce $500 billion in new asset purchases, likely focused on agency mortgage-backed securities.

–CAPITAL ECONOMICS: Recent U.S. economic data haven’t been weak enough to prompt Fed easing at this week’s policy meeting, says economist Paul Dales. Capital Economics expects the U.S. economy to grow 2% this year, which means that the 1.5% GDP second-quarter growth is only slightly below its potential and that the case for further stimulus is “not clear cut.”

–SOCIETE GENERALE: Economists expect the Fed to wait until September before launching QE3 since the central bank just announced in June the extension of “Operation Twist,” its program to buy longer-maturity Treasurys to lower long-term interest rates. At this week’s meeting, the Fed may extend its time reference for keeping low interest rates beyond late 2014, says head of research Stephen Gallagher.

–MILLER TABAK: Andrew Wilkinson, chief economic strategist, says he “wouldn’t be surprised” if the Fed announced another round of bond-buying Wednesday, adding that the Fed is more likely to act this week than in September. Potentially standing in the way of immediate Fed action are the jobs report for July due out Friday and the central bank’s annual Economic Policy Symposium in Jackson Hole, Wyo., at the end of August, but both events will be “overshadowed by the towering amount of evidence that the economy has slowed rapidly,” he says.

–BARCLAYS: The second-quarter GDP number is unlikely to shift the Fed’s debate over the need for further stimulus, Barclays says. Analysts continue to expect no additional Fed easing at this week’s meeting.

–NOMURA SECURITIES: Nomura doesn’t expect the Fed to announce any new policies this week because the data haven’t been weak enough to gather a strong consensus for stimulus, says strategist Charles St. Arnaud. The Fed is also likely to wait and see if the European Central Bank cuts rates at its meeting Thursday, Mr. St. Arnaud adds.

–CITIGROUP: Anyone looking for aggressive Fed action this week “will ultimately be disappointed” because the FOMC will likely wait for two more rounds of labor market and economic data before it acts, Citi analysts say.

–DEUTSCHE BANK: The GDP data confirm the prevailing view that “the Fed can wait for more clarity on the economy from the next two employment reports” before potentially launching another round of easing at its September meeting, says currency strategist Alan Ruskin. He notes that gold, which is often a gauge of QE expectations, has “appropriately come off a touch.”

–HIGH FREQUENCY ECONOMICS: Economist Jim O’Sullivan says new asset purchases by the Fed are more likely in September since much of this week’s economic data won’t be available to the Fed before the meeting ends, especially the July unemployment data coming Friday. The Fed will extend its rate guidance at this week’s meeting to mid-2015 from late 2014, Mr. O’Sullivan predicts.

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